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Abstract:
Thinly-traded assets exhibit illiquidity and do not fit in the efficient market paradigm. Direct application of classical finance theories to illiquid assets simply ignores the illiquidity risk of thinly-traded assets. Using commercial real estate as a testing ground, this paper develops a new, closed-form ex ante risk metric that converts illiquidity risk and integrates it with real estate price risk. Such integration provides a formal and easy-to-use analytical tool for illiquid asset pricing and enables apples-to-apples comparison between the performances of real estate and financial assets. Using real estate data, we show that the conventional risk metric significantly underestimates the true real estate risk and our finding helps to explain the apparent “risk premium puzzle” in real estate.

Abstract:
This paper develops a formal model to examine the effect of changing market conditions and individuals' selling constraints on expected selling price and time-on-market. Using the concept of Relative Liquidity Constraint (RLC) - a stochastic variable that captures the randomness of future individual constraints and market conditions - the study presents the first ex ante analysis that extends the investigation of the issue of seller heterogeneity to the point of the buying decision, that is, from the perspective of the buyer's (future seller's) point of view. We show that seller constraint, as well as the uncertainty of such a constraint, significantly depresses the expected selling price and increases risk. Our closed-form formulas provide a set of simple quantitative tools that enable buyers and sellers to adjust the "market average" to their ex ante "individual expectations".

Home Price, Time-on-market, Seller Heterogeneity, Housing Market Conditions

Abstract:
The effect of gated access restrictions on garden apartment rents is empirically evaluated. Garden apartment rents are positively related to the presence of gated access constraints, although the combination of in-unit alarms with gated access is rent neutral. One-bedroom and two-bedroom units garner higher rents with the presence of gated access constraints. The research extends prior research on high-rise units indicating that 24-hour security positively impacts occupancy and gross rental income. Given that the study uses data from only one market, additional research for other cities and regions is warranted.

apartment, garden, rent, gated, security

Abstract:
This paper comments on the Weighted Repeated Sales (WRS) method in Case and Shiller (1989). We find that Case-Shiller’s model for step-two of WRS is conceptually mis-specified and empirically inaccurate, which are likely to cause the S&P/Case-Shiller Home Price Indices to be biased for the most critical housing markets (i.e. nine of the ten cities with housing related derivatives based on the indices). Based on our examination of real estate market risks, we propose a quadratic model for the second step of WRS and show that our specification is actually more consistent with the findings by Case and Shiller (1989).

Abstract:
This paper documents women on average pay more for mortgages than men. The disparity cannot be fully explained by traditional variables such as mortgage features, borrower characteristics, and market conditions. While the persistence of gender disparity may suggest discrimination, we offer a different explanation: women pay higher rates because they are more likely to choose lenders by recommendation while men tend to search for the lowest rate. Our empirical test confirms that search effort is rewarded in marketplace, and suggests that gender disparity in mortgage rates may be addressed by policies aimed at improving women’s financial literacy and search skills.

Abstract:
This article develops a model and provides a closed-form formula to uncover the theoretical relationship between real estate price and time on market (TOM). Our model shows a nonlinear positive price-TOM relationship, and it identifies three economic factors that affect the impact of TOM on sale price. We demonstrate that conventional metrics for real estate return and risk, which are borrowed in a naïve fashion from finance theory, do not account for marketing period risk and tend to overestimate real estate returns and underestimate real estate risks. Our model provides a simple way to correct such bias. This theory helps to explain the apparent risk-premium puzzle in real estate.

Abstract:
Rational investors distinguish between extremely high and extremely low returns. The measures of investment risk should reflect such asymmetric risk perception. This study presents six asymmetric risk metrics and empirically tests their abilities in explaining the cross-sectional variations of real estate returns. It finds strong evidence that systematic downside risk is associated with a risk premium, and skewness provides significant explanatory power to the variation of cross-sectional property returns. On the other hand, co-skewness does not explain real estate returns well and is not a good systematic risk measure.

Abstract:
This study investigates the potential for farmland to improve mixed-asset portfolio efficiency. Three major conclusions are drawn from the research. First, in a world with certainty, farmland can be shown to statistically improve mixed-asset portfolio efficiency. Second, with the introduction of uncertainty into the portfolio allocation model, investors can justify small or no allocations of farmland in a mixed-asset portfolio, although it appears that even with uncertainty prudent investors should evaluate the asset class. Third, with respect to farmland investment and geographic diversification, the results question the ability of an optimized mean-variance portfolio to provide substantial improvement in comparison to a naive portfolio. The marginal improvement in portfolio efficiency of an optimized farmland portfolio versus a naive farmland portfolio is not statistically significant.

farmland, investment, mean-variance efficiency, mixed-asset portfolio

Abstract:
Published research has offered little evidence in support of foreign real estate investment. Most of the literature suggests that foreign real estate yields investors in mixed-asset portfolios no tangible benefits in terms of diversification gains. However all these studies were done on the basis of point estimates where they solve for a single unique optimum portfolio composition. Thus, earlier research has left the impression that foreign real estate is "never" optimal. Here we use a bootstrap simulation to introduce uncertainty into the analysis. Our results suggest that although foreign real estate is not likely to provide investors with significant diversification benefits, substantial amounts of foreign real estate can potentially be optimal.

Abstract:
Recent market segmentation research has begun to delve into the issue of whether traditional property type categories are sufficiently homogeneous to be modeled as aggregate real estate markets. This paper extends the research on rental-property market segmentation by investigating the existence of apartment submarkets determined by unit type. The study finds that one bedroom, one bath units; two bedroom, one bath units; and two bedroom, two bath units function as distinct submarkets differentiated by property features, neighborhood location, and temporal changes in market rent.